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'Buy the dips': The Wall Street cliche that has worked like a charm

November 18, 2009 |  6:00 am

One of the biggest fears as the stock market began to rebound late last winter was that sellers would swarm just as soon as the advance lost its momentum. Who would want to risk hanging around for another meltdown?

Instead, this now eight-month-old rally has been powered by classic bull-market thinking -- which is, you don’t sell the dips, you buy them.

As the accompanying chart of the Standard & Poor’s 500 index shows, the market has pulled back on numerous occasions since early March, but none of those declines has snowballed. The selling has quickly ebbed and buyers have regained the upper hand.

The most recent pullback occurred from Oct. 21 to Nov. 2, when the S&P fell 6.6% (as measured by its intraday highs and lows).

Markets18 It was another gift to sidelined investors: Since the Nov. 2 low the S&P is up 7.9%. It closed at a 13-month high of 1,110.32 on Tuesday.

The simple definition of a bull market is when more investors want in than want out. We know the fundamental reason why that has been so in this year’s rebound: Investors sensed that the economy would begin to emerge from recession, which it has, even if the labor market has been left behind. A turn in the economy was expected to help corporate earnings  improve, which they have, though in large part because of brutal cost-cutting.

Meanwhile, short-term interest rates remain near zero and long-term rates have tumbled, further bolstering the case for equities. Rock-bottom short-term rates also power the "carry trade," encouraging speculators to borrow to buy stocks and other risky assets.

The market’s performance also has fueled plenty of conspiracy theories, usually centered on the idea that the Obama administration, the Federal Reserve and, of course, Goldman Sachs are making sure that stocks stay elevated. (If only it could be that easy.)

With 2009 winding down there’s another factor supporting the market, and it may trump everything else for the time being: Professional money managers can’t afford to take the chance of paring back sharply on stocks, for fear that this rally will keep going and leave them behind. And those who aren't in need to get in.

After the horrors of 2008, a money manager who doesn’t keep up with the market’s comeback this year is facing his or her greatest risk of all: the risk of unemployment.

Although many individual investors have stayed away from stocks as the market has climbed, they only have to answer to themselves, or maybe to their spouses. A fund manager who is lagging will have to face the wrath of aggravated clients for a second year in a row.

"This market is a nightmare for under-invested portfolio managers," says Jeff Saut, chief investment strategist at brokerage Raymond James & Associates. That, he says, explains why it doesn’t take much of decline in share prices to pull in buyers: Managers with cash really do see any dip as a gift.

A bigger sell-off is out there, somewhere. But Saut doesn’t see it coming soon.

His message to clients, he said, is: "You can get cautious, but don’t get bearish."

-- Tom Petruno

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